Yamana Gold Is a Golden Bet

Yamana Gold (AUY) announced its fourth quarter 2015 results on 18th February. The company has fought it out very successfully against the severe fall in metal prices, especially gold, during the last year. The average realized price for the yellow metal fell almost by $ 100 per ounce in both the fourth quarter and the full year 2015 compared to the same periods of 2014.

For the three months that ended on 31st December 2015, the average realized price of gold was $ 1,101 per ounce compared to $ 1,199 per ounce last year. Similarly, the average realized price was $ 1,156 per ounce for the full year 2015 compared to $ 1,256 per ounce for full year 2014.

Cost reduction:

Still, the company was able to maintain healthy and comparable gross margins during the year despite a fall in metal prices. Although the revenue was negatively affected, the margins were maintained very close to what they were in 2014 due to cost control and portfolio realignment. In fact, for the fourth quarter, the percentage gross margin was 0.5 % higher than the same quarter of 2014. In the absence of the price fall, the margins would have been 49.8 % and 46.5 % for Q4 2015 and FY 2015 respectively.

Yamana Gold has improved its cost structure a lot by focusing on delivering more output. The company delivered an increasing annual production within its guidance range. The production figures for the three metals that the company produces are approximately 1.28 million ounces of gold which was within its guidance, 9 million ounces of silver again within the guidance and 131 million pounds of copper which was above its guidance.

The cash costs for gold were $ 596 per ounce of gold for the full year and $ 541 per ounce for the fourth quarter. The all-in sustaining costs (AISC) were $ 842 per ounce of gold for the full year and $ 753 per ounce of gold for the fourth quarter. These production costs were amongst the lowest in the industry. The company has been very much successful in reducing its costs last year and its plans in the same direction for this year are even more appreciable.

Grades:

What would make this cost reduction target possible to be achieved will be the higher grades of ore that Yamana Gold is encountering at its mines. For instance, at Chapada, the full year gold production increased 11 % because of 18 % higher grades. This increased the recovery and throughput of the mine and helped reduce the co-product gold cash costs by 20 %. Similarly, Jacobina showed 22 % higher grade for 2015 and continues to show this improvement in grade in the current year too. And similar were the stories at most other gold mines of Yaman Gold in 2015. For 2016, it was indicated in the conference call that more projects to increase recoveries, improve throughput, and reduce cost are underway and upcoming. Especially, the retrofit project to upgrade the flotation circuitries on time on a schedule to be completed at the beginning of Q2 was mentioned by the southern operation person Gerardo Fernandez.

Gold price drivers:

Gold prices started improving timely for gold producers as soon as the US Fed dropped plans of an interest rate hike till now in 2016. And they have improved significantly in the current year as the probability of a possible hike in the near term has kept diminishing with time. The simple equation between interest rates and gold prices is that when interest rates are low, investors prefer to invest in gold because they tend to get higher returns in the latter. Now, since investors did expect a Fed rate hike but didn’t get it, they won’t wait more to return to the safe haven (gold). So they are now including more gold into their portfolio as a hedge against market volatility. This very shift in investor strategy has pushed up the demand for gold sending the yellow metal to an eight-month high above $ 1,260 earlier in the month.

The recent rally was also caused by the move to negative rates from some other central banks, which in turn came in response to concerns over the global economic outlook. Also, the UD dollar did show some weakness of late which further spurred the investors to apply the traditional hedging tactic of buying gold.

However, more recently, the strength in equity markets around the globe could undermine some of the gain enjoyed by gold. There has also been some recovery in the dollar this week as the pound falls due to Brexit concerns. But these should be taken as short-term fluctuations by investors and may not define the long term trend of any market.

Conclusion

Hence, Yamana Gold has done well to keep its costs as well as output volumes under control which will go a long way in defining the direction this stock will move in over the long term. It has got some great high-grade assets like Chapada which are delivering a very high grade of gold and helping the company achieve its production and cost targets. Further, the long-term drivers of a gold price improvement appear far stronger than those of a gold price decline from here.